Let me say that Larry Summers certainly
holds to the Democratic Party mantra of job creation through monetary
policy. However, he really could care less about jobs, in my opinion,
when push comes to shove. Larry Summers cares about banks. And low interest rates insures that banks remain functioning, as they skate on thin ice, like Will Rogers once said about the state of banks in the Great Depression.

You cannot have a 25 basis rate hike without putting the banks on
thin ice these days. That is the Summers' message. And China just cut
their funds rate .25 percent and our stock market in the United States
rejoiced for a while. Talk about thin ice.

Back in 2013, Summers talked about how the natural interest rate sans a bubble economy is negative. Yes,
negative. Remember, this is not some chump off the street. Larry
Summers was the second choice behind Janet Yellen for Fed chairman.

The relentless decline of the 10 year treasury bond interest rate,
stopped only by the Dot Com bubble and housing bubble, is decidedly down
over the past 20 years.

So, raising rates in the midst of little bubble activity seems to
Summers to be ludicrous. You could say housing is in another bubble. But
it is a bubble for the wealthy. It does not appear that Main Street is
participating in many bubbles right now except in auto sales. In fact,
it is more likely that main street is a victim of bubbles that exist, at
least in food, housing and until recently, oil and building
commodities.
Keeping Main Street weak, through technological gains and job
elimination and China slowing, could theoretically push interest rates
down to negative territory and certainly, the Fed fears Main Street
becoming strong without a reliance upon the credit their member banks
offer. Wage inflation is a no no, although bankers really like asset
inflation.

When Volcker raised interest rates to over 20 percent to stop
inflation back in the '70s, the act only destroyed the S&Ls. If
someone tried to stop overheating nowadays by that method, you would destroy the TBTF banks, ie. the financial system itself.

The economy simply cannot be permitted to overheat in any significant way, the key being tamping down any wage inflation which can be done whether there are bubbles or no bubbles. I think that this bully of a financial system has been Alan Greenspan's plan all along.
He has created this monster, with diminishing or stagnate main street
consumer demand, which Summers is trying to make sense of, with
potentially dreadful consequences.

So, Summers is basically saying or implying that the economy on Main Street cannot be permitted to engage in bubbles anymore, unless negative interest rates are available as a means of stimulus after the resulting crash.

Bloomberg agrees with Summers. There are not very many options left in a downturn.
The Fed wants to raise rates now, and lower them later while still
being positive. But it is looking like that could hurt the banking
systems and obviously undo the stock markets around the world.

Keeping Main Street bubble-free ensures some bank stability but
profits are low. Or if you want Main Street to engage in bubbles, and
Summers says they are necessary to growth, you have to allow negative
interest rates in times of bust. Of course, at the point at which the
negative interest rate is at minus 100 percent, you will just give your
money to the banks and never see it again.

While that prospect is ridiculous, Larry Summers, on his own blog, spoke of permanent secular stagnation.
Summers says that there is too much saving in America. He says that
this excess saving slows down the economy. Of course, his goal is a
cashless society, where people will have to put their money in the bank,
and in order to avoid losing it to negative interest, will be forced to
spend the money to stimulate the economy.

That is his way of aborting secular stagnation, or deflation. Summers is far more worried about secular stagnation than he is worried about inflation.

Summers believes that in any crisis, Fed funds rates must be cut at
least three to four percentage points. That means, if there was a crisis
today, Fed funds would need to be lowered to minus 3 to minus 4
percent! Without a cashless society in place, those low rates would be
difficult to do in the face of inevitable bank runs.

If you think that little notion of negative 4 percent is far-fetched, Nouriel Roubini and
Paul Krugman have advocated negative interest rates and/or a cashless
society as a means of stimulating the economy as well. While they make
valid arguments logically, I have to tell you that there is an aspect of totalitarianism in their thinking. Economics
as a dismal science rarely gets more dismal than this. I think this is a
potentially chilling plan going forward, as the world spirals towards
deflation.

But that is where we are as the Fed looks foolish in trying to raise
interest rates by a pitiful 25 basis points month after month, without
achieving the goal! The actions of the Fed make Larry Summers look more
reasonable and logical all the time, and that is scary. Derivatives are
the cause of this, you know. Derivatives' demand for collateral forces
treasury bond prices up and treasury bond yields down.

The need for collateral has made treasury bonds into rock stars. The
shortage of those bonds is a huge reason why I believe Summers wants
interest rates to stay low and go lower. It has nothing to do with
jobs. According to Summers, jobs are going to be lost anyway, to technology.

No, Summers wants low rates and it has to do with hedge funds,
financial clearing houses and banks. If interest rates remain low, the
people who need to buy scarce bonds as collateral will not be interfered
with by some old retired guy who wants to make a little interest on
bonds.

God forbid that the average Joe would hold precious clearing house collateral and have it lying around doing nothing! No, the financial system, and I think this is the crux of Larry Summers' thinking, has
to make treasury bonds look really ugly to the public. Low and negative
interest rates make these bonds ugly to Main Street, but they are still
very pretty to people who want to make deals on Wall Street.

This must be what people are talking about when they say the
financial system is divorced from the real world. There isn't anything
brave about this new world. It is dreadful in its design.

Truth is, Wall Street folks will pay banks for the privilege of
owning treasury bonds for use as collateral. They don't care if there
are negative interest rates. The more negative, the better, as that
means they won't have to worry about not having enough bonds with which
to do business.

Roubini, as I said above, is in the negative interest rate camp. No
big deal to him, since you accept zero interest at the bank and that is
an effective negative rate as inflation runs higher. Roubini says you
will also get used to accepting having money pulled out of your account
for interest payments when real negative rates become a reality.

I always thought Roubini had a Rasputin quality about him.

That need for negative interest rates to provide economic stimulus is
the only significant reason for a cashless society, to keep you from
hiding your money under the mattress and not spending it. All other
reasons are just secondary.

But Roubini talks about the mattress as well. He talks about
robberies increasing once thieves know society is putting money under
mattresses and in walls, and also he speaks about the destruction of
said money by rodents. I kid you not.

Roubini and Larry Summers are not madmen,but certainly there is a
sense of desperation and risk of negative consequences coming out in
their thinking. One could think that their thinking puts us on the edge
of the abyss of economic thought. But it is Roubini who wants you to
just accept negative rates voluntarily. I bet he can afford a
rodent-proof safe.

As I said, I don't believe these economists want Main Street to
participate in more bubbles until the negative interest rate regime is
in place. After all, they can't control the behavior of the masses in a
bubble-then-crash setting. They can't control the masses if interest
rates rise and the masses gobble up all their precious treasury bonds,
the new gold of the derivatives clearing houses.

They don't want people walking away from their loans again, because
they fear the government will be adverse to future bailouts. Truth is,
it will be easier to accomplish bail-ins if money is held captive in the
cashless society.

Better to have negative interest rates, so that people will want to
spend their money, say the economists. But Roubini's idea has a fatal
flaw: many will still hide their money and not spend it. That is, after
all, the prudent way to live, or at least always has been until this derivatives monster was created.

Summers, alas, has the plan that will work, force you to spend or lose money in your forced savings account. But the St. Louis Fed disagrees, saying that negative interest rates are not a tool that should be used by central banks:

The above examples of negative central bank policy rates are
newsworthy because they are unusual. Some analysts have argued that such
examples suggest that central banks should consider setting negative
policy rates, including negative rates on deposits held at the central
bank. Such proposals are foolish for a number of reasons. First, a
policy rate likely would be set to a negative value only when economic
conditions are so weak that the central bank has previously reduced its
policy rate to zero. Identifying creditworthy borrowers during such
periods is unusually challenging. How strongly should banks during such a
period be encouraged to expand lending? Second, negative central bank
interest rates may be interpreted as a tax on banks—a tax that is
highest during periods of quantitative easing (QE)Central banks
typically implement QE policies via large-scale asset purchases. Sellers
of these assets are paid in newly created central bank deposits, which,
in due course, arrive in the accounts of commercial banks at the
central bank. It is an axiom of central banking that the banking system
itself cannot reduce the aggregate amount of its central bank deposits no matter how many loans are made
because the funds loaned by one bank eventually are redeposited at
another. Is it reasonable for the central bank to impose a tax on
deposits held at the central bank when the central bank itself determines
the amount of such deposits held by banks and the banking system?
Perhaps these and other considerations caused European Central Bank
President Mario Draghi in a recent press conference to label negative
deposit rates "uncharted waters" and dismiss any possibility that the
ECB would consider it.
In summary, in normal economic times, both nominal and real interest
rates are positive. But in unusual times, negative nominal and real
yields are not unusual. Both often reflect investors' flight to safety.
The existence of negative yields, however, provides no support for the
argument that central banks should consider negative policy rates as a
monetary policy tool.

Remember I said that Summers only cares about the banks. He would
surely expect the banks to pass on negative Fed Funds rate to customers,
making the negative savings rate even more negative than the Funds
Rate. He would sacrifice the savings of Main Street Americans to keep
the banking system afloat in a deflationary environment. Stimulus would
come from savers, and while it makes logical sense, it is a real theft, a
tax imposed by a financial system that is not our government, but is
international and not beholden to, nor patriotic toward, any national
government.

Negative interest rates could vary from nation to nation, but would
be a New World Order private tax, collected by the globalists and their
banks, not from government. Talk about taxation without representation.
Keep in mind that the St. Louis Fed said that rates are negative in
unusual times, while Summers has said that rates are negative when there
are no bubbles. Summers is saying that negative rates are a new normal,
if you will.

How Americans react to this potential totalitarianism of finance will
certainly be interesting to watch going forward. Perhaps if Summers is
thwarted in his grand plan, the next downturn could see stimulus just
handed out to regular people, with the caveat that it could not be used
to pay down debt, only to spend towards a little prosperity for the
economy. Summers' plan is totally reasonable, in a crazy sort of way, if
his assumptions are correct about our "unusual times".

You would think consumer spending and dollar turnover would create a
multiplier effect, if Main Street had any extra dollars, that is. But
giving Main Street extra dollars risks overheating the economy, which I
have already said cannot be stopped by conventional means. Volcker-type
interest rate hikes would destroy the TBTF banks, not just S&Ls.

I am not sure the consumer's pocketbook can survive the potential
triple Fed mandate of wage stagnation, asset inflation, and negative
interest rates all happening at the same time. It sounds as if Larry
Summers wants this, and if unusual times are the new normal, he is
saying there is no other choice in the future.

Comments

Post a Comment

Popular posts from this blog

Join Talkmarkets for Financial Information. It is free! https://goo.gl/QZff5YI have written a lot of vetted articles that are exclusive** to Talkmarkets. Sorting a portion of them by subject will give the reader an opportunity to make sense of it all. I am adding a glossary of terms at the bottom of this page.For readers interested in economic subjects of the day, these top 30 themes are my efforts to make understanding economics easier:

John Mauldin published an article regarding the economics of Donald Trump. I share many of his views. I think the article deserves to be discussed further.

It isn't as if John Mauldin is happy with the continual drive toward negative yields and the new normal. I believe he is like many, willing to fight for higher interest rates within reason and within the economic boundaries that exist. He is on board with the Fed, unlike other central banks, and is willing to risk recession to avoid negative rates:

Meanwhile, the Fed is in the middle of a long-overdue policy turn. There’s still a risk that they will find they started tightening just in time for a recession, which is also long overdue. I was convinced last summer that they would push rates negative in that scenario. Negative rates could yet happen, but I think they wi…

Money theory is mostly a fraud to convince people that regular folks should not accumulate too much money. The economists all fear money velocity. They are likely very well meaning and are textbook sound, but certainly they do unknowingly help advance what I believe to be a scam. The following statement by Will Rogers is worth more than all the economists put into a basket as to its veracity about the ridiculousness of fearing a little money velocity:This election was lost four and six years ago, not this year. They [Republicans] didn’t start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it g…